Shareholder Disputes

Project Description

Shareholder Dispute Lawyers

A business of any size may involve shareholders or owners who have disputes. Small and mid-sized businesses are especially prone to developing major issues as a result of disputes that arise in close working relationships. Working in close proximity with other significant stakeholders is a recipe for conflict in some situations. Conflict among shareholders or owners can arise in several ways.

Management deadlock

One way that owners and managers can become embroiled in a conflict is when deadlock occurs. Deadlock means that the decision makers are split on an important decision. This commonly happens when decision-making authority is split evenly between 2, 4, or 6 individuals.

The best way to address deadlock is to foresee possible issues in advance and distribute authority in a way that makes deadlock less likely. Appointing 3 or 5 directors to the board will be inherently more stable for long-term management than appointing 2 or 4 directors. However, we understand that sometimes that isn’t possible. An alternative involves building tie-breaking procedures into the company’s organizing documents. The bylaws or operating agreement can specify how deadlock will be broken when important disagreements arise.

When deadlock does occur, it may be necessary to restructure the company by buying out one or more owners so that the company can move forward. However, a decision of this magnitude should only be made after consulting with an experienced business attorney.

Shareholder oppression

Under Pennsylvania law, the directors and majority shareholders of closely-held corporations owe fiduciary duties to the shareholders generally and to minority shareholders who do not control the business. The controlling majority owners are not permitted to use their authority to oppress the minority owners. Situations involving oppression arise whenever the majority owners attempt to manipulate the business in a way that unfairly favors their interests over the interests of their partners.

Some oppression comes in the form of blatant self-dealing. A controlling majority shareholder might use his or her authority to direct company funds to himself or to a related company. Sometimes oppression involves watering down the ownership interest of the minority partners. Other forms include freezing out or squeezing out by withholding distributions, employment, or other benefits in an attempt to force the minority owners out of the business.

Shareholder derivative actions

Minority shareholders sometimes have the option of bringing legal action on behalf of the company when the company managers fail or refuse to act reasonably on their own. A derivative action might be against one of the directors or managers directly, or against some third party that management refuses to pursue. The minority shareholder must show that the action is in the best interests of the company in order to bring an action in the name of the company.

Stock sale or stock redemption

A stock sale is when company ownership is sold to an individual, and a stock redemption is when the company buys the ownership units back itself. Either transaction may arise because the parties voluntarily agree on terms or because a forced-buyout provision is triggered.

Forced buyout provisions in the bylaws, operating agreement, or shareholders’ agreement can be written in an infinite number of customized ways. When considering including a forced buyout provision, it is important to seek the advice of legal counsel to ensure that anything included in the ultimate document furthers the goals of the business.